P/F Bakkafrost

OSE:BAKKA

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Høgni Jakobsen, executive]

Bakkafrost's report for the third quarter. My name is Hogni Jakobsen, CFO of Bakkafrost, joined this morning by Regin Jacobsen, our CEO. First, I will ask to pay attention to our disclaimer on forward-looking statements, which is included in the published presentation. This morning, we'll start by a summary of the quarter followed by markets and sales, financials, operations and finally outlook.

In the third quarter, Bakkafrost had revenues of NOK 1.737 billion and operational EBIT of NOK 173 million. Both of these were lower than the same period last year. Faroe's harvest increased from around 16.7 kiloton to 21,618 tonnes. A part of this was delayed harvest that was pushed into Q3 from Q2 due to the strike that we had in the second quarter in the Faroe Islands.

In Scotland, we harvested 5,411 tonnes, which was around 1,300 tonne, up from the same period last year. In our FOF division of Havsbrún, feed sales increased with 16% to around 41.5 kiloton. External sales of fish oil was 8 tonnes compared to 8,000 tonnes last year. External sales of fish meal was lower, around 9,300 tonnes compared to 16,000 tonnes last year. And Havsbrún also sourced lower volumes of marine raw materials, 40,000 tonnes compared to around 110,000 tonnes last year.

But again, we need to have in mind that last year was an exceptional year at Havsbrún, where Marine sourcing was more than 50% up from what is normally considered a strong year at Havsbrún. Cash flow from operations was positive with DKK 575 million compared to DKK 185 million, and all segments were positive except for the Scottish freshwater and farming segments and the Faroese Farming segment.

Moving on to markets and sales, beginning with the price development in the global markets. The average price for 4 to 5-kilo superior salmon in the quarter was NOK 73.33 per kilo, which is around 7% lower than the same quarter last year and 34% lower than in the second quarter. Prices have been low during the entire quarter and also the premium for large fish was weaker in the beginning of the quarter. And then picked up during the quarter. The market has been affected by larger volumes of salmon coming from, especially Norway, smaller fish, which has been sold into the European market and putting a pressure on that market.

Norway has also sold more volumes into China in this quarter. According to the latest update from Kontali on sold quantities, global sales increased with 4.9% in the quarter. The biggest volume increase was sale to the European market, which increased with around 25,000 tonne or 8%. This is more or less in line with the increased production from Europe. Sales to the U.S. market was stable in the quarter after a more or less constant growth for a long period to the U.S. market.

Past 7 years since 2018, the European volumes that have been sold into the U.S. market has more or less doubled. Like in the second quarter, Chile sold lower volumes to the U.S. market in this quarter. And there was some price sensitivity also in some segments in U.S. Sale to Russia dropped by 50% due to reduced supply from Chile and sales to China increased 3%. As mentioned, Norway has supplied more salmon to the Chinese market, but Chile has also significantly improved their logistical setups, enabling them to supply the Chinese market better than they have done before.

Sales to Latin America and especially Brazil, also increased and 2 other markets as well. Global harvest in the market in the quarter increased by 5%. European harvest increased 9%, with very strong supply from the Faroes, Scotland and also increased supply from Norway. Norway was up 7%, partly driven by accelerated harvest due to sea lice challenges. Despite this, harvest weights were stable in Norway. There was strong growth in July with a 10% increase in feed sales, however, weaker later in the quarter. giving a 3% increase on feed sales in Norway in the quarter as a whole.

Harvest from Scotland increased 10%, driven by improved biology, also 10% increase on field sales there and 3% to 3.5% increase in average weights from Scotland. The Faroese harvest increased 41%, driven by strong biological performance. Harvest weights increased 13% in the Faroes and feed sales were up by 4%. In the Americas harvest dropped 4%. Chilean harvest was down by 2.4%, and Canadian harvest was down by 13%.

Moving on to the financials. Revenue in this quarter decreased, as mentioned before, to DKK 1,737 million. Operating EBIT reduced from DKK 269 million last year to DKK 173 million. We had negative fair value adjustments of DKK 266 million and the revenue tax in this quarter was minus DKK 8 million compared to minus DKK 57 million in the same quarter last year, and this is because of the lower salmon prices. Profit after tax was negative with DKK 160 million. Operational EBIT year-to-date is at DKK 1.270 billion and adjusted earnings year-to-date at DKK 12.5.

And on the balance sheet, since year-end '23, our property, plant and equipment have increased by DKK 355 billion to around DKK 6.6 billion. Fair value of the biological assets at the end of the quarter were DKK 2.6 billion, a reduction of DKK 734 million since year-end. Inventories have reduced by DKK 427 million to DKK 721 million and receivables reduced by DKK 121 million to around DKK 729 million at the end of the quarter.

Cash and cash equivalents were DKK 839 million, an increase of DKK 427 million, and equity ratio 62%. Cash flow from operations were positive with DKK 575 million in the quarter, investments negative with DKK 245 million. And from financing negative with DKK 99 million. We have decreased net interest-bearing debt during the quarter with DKK 256 million. At the end of the quarter, the net debt was around DKK 2.7 billion and also the undrawn credit facilities were at DKK 2.7 billion at the end of the quarter. And then I will hand over to you, Regin.

[Johan Jacobsen, executive]

Thank you, and good morning. When we look at the performance per region in this quarter, the performance can be broken down in Faroe Islands to a margin of DKK 14.35; and in Scotland at minus DKK 25.45. In the Faroes Islands, the value creation comes from the FOF segment, where we had DKK 6.8 per kilo. The sales and other at DKK 4.45 and fresh water DKK 3.9 per kilo. Services at DKK 1.03. In both regions, we had negative contribution from the farming itself. This shows that when the farming operation is weak, the whole value chain actually plays a significant role.

In Scotland, we also see that the value chain come from -- contributes with DKK 9.6 million from sales and other. But let's look into the segments. In the third quarter, the FOF segment this year sourced 40,000 a tonne versus 110,000 tonne last year. So a 70,000 tonne reduction in raw materials. The feed sales increased 16% in the quarter to 42,000 tonnes versus 36,000 last year. The external sales of fishmeal and oil are, of course, also down. 42% of fishmeal to 9,000 tonne versus 16, 000 last year. And fish oil was close to 0. The operational EBIT from the FOF segment decreased 52% to DKK 147 million versus DKK 309 million last year, which was exceptionally good. The market price on fish oil has dropped significantly during the last couple of weeks, more or less halved, but fishmeal prices have been somewhat stable.

The outlook with significantly lower fish oil costs will have a positive impact on feed prices, of course, going forward, as it will reduce the prices for sourced raw materials. When you look into the freshwater segment, the hatcheries, in Faroes Islands, we are continuing wrapping up the operations since we expanded the capacity 50% last year with Glyvradal and Norðtoftir. However, it will also be a ramping up period during next year. Ramping has been actually good this year, a bit better than we had expected. So that's why we are also increasing the number of stocking now in the fourth quarter.

In the third quarter, the total transfer to Marine was 48% up to 4.9 million compared with 3.3 million last year. The size of fish was 4% up to 423 grams versus 405 grams last year. And the EBIT from the segment -- the operational EBIT increased 79% to DKK 84 million from DKK 47 million last year. And we have also seen a good cost development in this segment with low cost price on the smolt.

And we see a robust and strong biology in the smolt, which is crucial for our healthy farming operation. The operational EBIT was 21% up to NOK 64.11 per kilo versus NOK 53 last year. The biomass in the freshwater segment, in the hatcheries in the Faroe Islands is 75% up, which is, of course, driven by the ramping up of this operation. Number of fish is also increasing. The monthly feeding has doubled compared with last year. And that will, of course, drive the further increase of the operation in this segment in the coming quarters. As a result from this good development, we now increased back to 17.7 million for the full year, stocking this year. So there will be a bit higher stocking in the fourth quarter than we expected a while ago.

In Scotland, we have, as you know, struggled this year with the ramping up of the operation of Applecross, which took a bit longer time because of the issues that we saw last winter. So we have continued in this quarter to stock small fish, 1.9 million versus 2.5 million last year, 24% down. And the average weight is also on the 86 gram. The operational EBIT was minus DKK 6 million versus DKK 17 million last year. The volume in the operation does not reflect the capacity that we have built. But we are now starting to transition to larger smolt, which we also indicate on this graph to the bottom on the right side on this page.

And therefore, we are now in the fourth quarter stocking small fish, holding back. So that's also why we take the number of stocked fish this year a bit down. And then we wait -- keep the fish in the hatchery and grow them bigger. Now as AP5 is in operation. So we will -- in the end of the fourth quarter, we will start to stock larger fish.

And as I said, keep some of the fish in the hatchery for stocking in the first quarter instead. Looking in the -- at the farming operation in the Faroes Islands, the volume harvested increased 29%. As we saw, Hogni mentioned, harvest in Faroes in general, was 41% up. So there's a big -- been a lot of harvest in the Faroe Islands. And just as Hogni mentioned, biology in general is good, but it's also driven by the strike, which we had in end of the second quarter, where we had 4 weeks of no harvest. So that also moved some fish unfortunately, from a period with high prices into a period with lower prices.

So in this quarter, we harvested 21,618 tonnes, up from 16,700 tonnes last year, 29% up. The average weight is also good, 5.3 kilo up from 4.8 kilo, despite that we harvested this fish that relates to the ISA incident in two pens, which were taken out in the second quarter, we had to empty all that site about 3,800 tonnes at low average weight and, of course, also high costs.

But there were no ISA on this fish, but they had to be taken out. So that contributed to a situation in the quarter where we had to harvest big volumes in a soft market, which contributed to a lower price achievement, weaker premium, which is negative. But we are pleased that the development with this issue at A-19 where the ISA was detected in the second quarter that our procedures kept the virus away, and there were no infection to any other cages or any other farms and the challenges behind us.

And in general, the biological performance, as said in the quarter was good, with good feed commercial rate, good growth rates and et cetera. When we look at the average weights, as said, from A-19, the average weight of this harvest in this quarter was only 3.4 kilo, not 3.8 kilo, it was not 3.4 kilos, and it was 23% of all harvest in the period. Other harvest was, in West average weight was 5.5 kilo. In the North, the average weight was 6-kilo, got it. So that contributed, of course, that we could have an average weight of all harvest at 5.3 kilos.

Looking at the temperature profile in Faroes, we see that it's more or less aligned with average for the last 20 years, around 0.2 degrees above the average. Looking into Farming in Scotland. The volume was 32% up to 5,400 tonnes compared with 4,100 tonnes. The average weight was good, 4.2 kilo compared with 3.1 kilo last year. The EBIT was also 37% up, but still a negative number, DKK 179 million in minus versus DKK 282 million. And the operational EBIT improved 50%, but still it was negative. So this is, of course, very much on the back of derisking operation where the strategy was to take the risk down before we came into the third quarter. We have focused very much on survivability, keeping the fish alive.

And we successfully reduced the mortality with around 80% in the quarter compared with last year, which is, of course, significant. By the end of the second quarter, we had harvested 75% of the fish that we expected to harvest this year. And if we calculate on what value the derisking strategy contributed, we find a number of GBP 31 million, which is a large number and of course, is important.

But I think the real value in Scotland will be when we have a healthy and robust smolt, which unfortunately have not seen yet. But we are, as we saw on the other page on a journey where we will see more -- we will see now a transition to largest smolt. In Scotland, I can also say that we are now harvesting only ASC certified fish, all our sites that we harvest from are ASC certified now. In Faroes, we already are at 100%. We also focus on cost management. So we have reduced costs to balance the costs with the actual production. So as mentioned on last presentation, we have closed the processing facility at Marybank which resulted in 81 redundancies.

So all over the line, we are focusing on balancing cost with the actual production. The biomass in the sea is 600-gram larger than the same time last year. Some biomass is being carried forward where possible because of good operation. But there will probably be a bit more harvest in the fourth quarter than we expected earlier. So we are taking the volume a bit up compared with what we have communicated earlier.

But from the hatchery, as we are now ramping up the operation in the hatchery, at applecross, AP5 is now in operation. Therefore, we are now stopping transferring the small smolt and going to largest smolt. The temperature on the profile here is also as we have seen over the last 20 years, except from June, July, where we saw a tick down, which you can see on the red line, which is below the average. But in August and September, it was more or less on average. The service segment includes different things. It includes harvest, biogas, but also very important, the farming service vessels. This is the treatment -- dual freshwater treatment. This segment in this quarter contributed with an EBIT of DKK 19 million compared with DKK 21 million % last year.

But the most important information is probably that we keep a very healthy fish, both in Faroes and in Scotland. We see the sea lice numbers, which are very good, below 0.2% on average, and we are quite happy with this operation, which are proven to keep a good health on our fish, both on gills, but also to keep sea lice away from our fish.

Looking into the sales segment, sales and other. We had less contribution from VAP, but this quarter was good in VAP. In this quarter, we transferred 36% less volume to VAP compared with last year, 4,495 tonnes versus around 7,000 last year. The operational EBIT in this segment increased 90% to DKK 148 million versus DKK 78 million last year. And the margin was NOK 8.6 versus NOK 5.7.

In this quarter, the VAP share was 21% versus 42% last year. So a much lower share, which reflects the changed strategy where we took contracts down due to the revenue tax situation. And going forward, we will also keep this number lower than we have done in previous years. The European market was relatively strong for Bakkafrost in the third quarter with 54% of the sales from Faroes and 75% from Scotland. So it's the most important market.

But the U.S. market has taken a big volume, but has been weaker with 23% of relative market share from Faroes and 8% from Scotland. Especially, we see that Faroes dropped from 30% to 23% as the market in general had a weaker trend in this quarter. We don't expect and we don't see this to continue. So if you look at the outlook for the summer market in general, it seems to be a diminished growth in Europe, 5% growth expected in the fourth quarter, but especially from Europe, there was a high growth in the third quarter with around 9% from Europe growth. We see this coming down in the fourth quarter.

Through '25, we see low-digit growth coming. From Americas, there has been a very weak supply growth or a drop. It looks like it will still be weak, but there seem to be some change of farming from coho to Atlantic, which will contribute to some growth in the second half of next year, second half of '25, where 6% growth is expected.

So the global supply of Atlantic salmon seems to be muted in coming years with low-digit numbers, 1-digit numbers. And in the fourth quarter coming somewhat down compared with the third quarter. And in '25 first half, I guess the biggest trigger will be about the downgrades. As we have seen that the market has been divided more or less in 2 parts because of this issue, especially where retail has been focusing very much on these volumes.

If you look at our operation and the outlook, we expect now 89,600 tonnes in '24 coming from Faroes, 63,500 in Faroes -- 89,500 tonnes for the group, 63,500 tonnes in Faroes and 26,100 tonnes in Scotland. In Faroes, we could take the number up, but we see the good biology, and we think that the first quarter will contribute with higher prices. So we maintain this volume.

Next year, we hope to get number -- the volume in Faroes up to 77,000 tonnes, which is a good growth from this year. And in Scotland, we take the number this year up to 26,100 tonnes, but next year down to 23,000 tonnes. So that means that for the group this year, the number at the moment looks to be 89,600 tonnes and next year, 100,000 tonnes. Also in Scotland, next year, we will continue the derisking strategy. As we saw in the earlier graph, a lot of the fish in the water is still from the old regime with 100-gram fish. But during next year will be a transition period where eventually, we will go to a larger share of the biomass to be from healthy, larger smolts.

So that means that in Scotland, we expect around 70% or so to be harvested in the first half of the year. And then the second half of the year, we hopefully can build up with healthier volumes. If you look at the smolt transfer, as said, we pick up the smolt transfer in Faroes to up to 17.7 million this year and next year, up to 18.5 million. This year, we expect the average weight to be around 400 -- 410-gram of the smolt. And next year, hopefully, a bit bigger, maybe 420, 430 gram.

The most important thing is the robustness of the fish. In Scotland, we now stop transferring smaller fish. And we go to the strategy of larger, healthier smolt. And the message is above 200 gram. So therefore, in Scotland, we hope to achieve a number of 10 million smolt next year at around 200 gram. On contracts, we plan to do around 15% of the expected total harvest on contracts and that's for the group.

The FOF segment, we expect more or less a stable development, no big changes. The big thing there is probably that it looks like at the moment that fish oil prices have come significantly down, which will be, of course, positive for costs. On the strategy, we maintain the development as communicated from our Capital Market Day in '23, except that we have delayed the fairly expansion until we see how development goes in Scotland.

So we took down the investments this year and next year by around DKK 800 million, and that's still the case. But we are following our track to reach 165,000 kilo tonnes by '28. And the next year, the focus is still on derisking in Scotland.

Thank you very much. Now we can open up for questions if there are any. And we have the mic. So...

[Martin Kaland, analyst]

Martin Kaland, ABG Sundal Collier. When you look at Scotland and then into 2025, the current loan mortality levels, lower feed prices should be positive, but then you also have lower scale with lower volumes. So could we see positive margins for the full year in Scotland next year assuming stable salmon prices? Or how do you look yes, in the '25?

[Johan Jacobsen, executive]

Yes. I think that should be possible. Of course, the negative thing is the volumes where we take the volume slightly down compared with this year. But we have taken action to reduce costs to reflect the volumes that we have. And as freshwater, hopefully now are going to produce more according to the costs in the freshwater segment. If you compare, for example, at the moment, the freshwater costs in Scotland and Faroes, in Faroes, we can produce one smolt at the same price per piece of smolt as in Scotland. But in Faroes, the average weight of the smolt is 410-gram and in Scotland 80 grams. But the price per piece is more or less the same. So in Scotland, of course, that will change dramatically as now we are going to utilize that capacity and also produce healthier smolt. So that will contribute in the right direction.

And Hopefully, we can now be in a transformation where the cost and the biomass also will come down as we see lower mortalities. So that should also contribute on the right way. We have seen a really soft -- or a softer market segment than we had expected this year. At the moment, also, I believe that the outlook for next year and the believe in the market is too pessimistic.

So I believe that the prices that we are going to realize in Scotland next year will be more positive than what we expect at the moment or what the market expects at the moment. So that should also contribute on the positive side. So with all that in mind, I think there is a chance that we should see positive numbers, yes.

[Martin Kaland, analyst]

Okay. Good. And on feed prices, how much has the feed price come down from the peak levels and with the potential now price drop on marine ingredients, what is your expected drop in feed prices.

[Johan Jacobsen, executive]

Yes. So until now, the feed prices have only come down very marginally. But now as oil prices now into the end of the third quarter are beginning -- or beginning of the fourth quarter are really dropping, that will contribute significantly. So if you say that the price comes down, let's say, DKK 15 or something like that and the content in feed recipe is, let's say, 15% that will contribute at least to around DKK 2 to DKK 3 per kilo, which is significant.

[Martin Kaland, analyst]

And then the positive impact on the farming segment will then be gradual throughout...

[Johan Jacobsen, executive]

That will be gradual -- yes, during '25, but mainly in the latter part of '25 and into '26, yes.

[Christian Nordby, analyst]

Christian Nordby, Arctic Securities. When I look at your cost per kilogram -- the EBIT cost per kilogram in the Faroe farming segment, that's been now quite flat around DKK 51, DKK 52 for quite many quarters. What's the reason why that doesn't drop when you have so much more volume in this quarter? Is it due to the ISA fish? Or is it something else?

[Johan Jacobsen, executive]

Yes, it's a good question. Just from the top of my head, you are quite right that the volumes should give some drop. In this quarter, there is a negative -- you can say it's bad cocktail to have the situation where we by the end of the second quarter and into the third quarter, had the strike and then we had the ISA.

So we had to push 3,500 tonnes of small fish and push good fish back. So that gave a really bad flexibility for our sales and marketing. First half of the quarter, we sold small fish -- only small fish. So we couldn't serve our customers properly. We had to push small fish to the market. And then suddenly, we came huge quantities of exceptionally large fish. So our ability to utilize our market position and as a premium brand was not ideal to understate.

So I think that's the biggest -- probably the biggest impact for Bakkafrost in this quarter. On the cost side, feed costs have not been reflected yet, the drop of feed cost. So we are more or less on peak on the cost side. There are obviously some benefits of larger volumes. But I think they are hidden because of the issues that I mentioned earlier.

[Christian Nordby, analyst]

And so when we then look into Q4, how do you view that in terms of cost base based on that, you now don't have ISA fish and you have a more stable market and quite good volumes still?

[Johan Jacobsen, executive]

Yes. We should see a gradual drop in cost price.

I don't see any other further questions. So thank you very much for coming.